Conventional 3% Down with PMI vs. FHA 3.5% Down - I Chose Conventional and Saved $8,400

When I started my home search in April 2024, I assumed FHA was my only option for minimal down payment. I had saved $11,500 and wanted to buy a $325,000 home—which meant 3.5% down ($11,375) would barely work with FHA, leaving me just $125 for closing costs and emergencies.

Then my loan officer mentioned conventional 3% down programs. I hadn’t even realized conventional allowed less than 5% down. After running the numbers comparing FHA 3.5% versus conventional 3%, I chose conventional despite it costing $64 more per month initially—because PMI removal in year 6 would save me $8,400 over 6-10 years compared to FHA’s permanent mortgage insurance.

Here’s the detailed math that drove my decision and why the long-term savings outweighed the short-term higher payment.

My Financial Profile for Purchase Comparison

• Purchase price: $325,000 (townhome in Charlotte, NC)
• Middle credit score: 688 (Experian 694, Equifax 688, TransUnion 682)
• Annual income: $68,000 ($5,667/month gross)
• Monthly debts: $385 car payment + $140 student loan = $525 total
• DTI before mortgage: 9.3%
• Down payment savings: $11,500 available

At 688 credit, I qualified for both FHA and conventional 3% down programs. My credit was strong enough for conventional but not quite at the 720+ tier where conventional becomes obviously cheaper than FHA.

FHA 3.5% Down Analysis

Down Payment: $11,375 (3.5% of $325,000)

This would consume nearly all my savings, leaving $125 for closing costs—which wasn’t realistic since closing costs typically run $6,000-$8,000.

My loan officer said I could ask the seller to pay $6,500 closing costs, which is allowed under FHA rules (seller can contribute up to 6% of purchase price toward buyer’s closing costs). This was my only option to make FHA work without depleting my emergency fund.

Loan Amount: $313,625 + $5,489 UFMIP = $319,114

FHA adds 1.75% upfront mortgage insurance premium to the loan balance: $313,625 × 1.75% = $5,489

My actual loan became $319,114—$5,489 larger than my borrowed amount for the house itself.

Interest Rate: 6.50%

FHA rates were competitive in April 2024. At 688 credit, I was quoted 6.50% with no points.

Monthly Principal & Interest: $2,017

Annual Mortgage Insurance: $2,553 ($213/month)

FHA charges 0.80% annually on loans with less than 5% down: $319,114 × 0.80% = $2,553/year = $213/month

This mortgage insurance is PERMANENT—it never goes away unless I refinance out of FHA or pay down to less than 78% LTV and then refinance.

Total Monthly Payment: $2,501

• $2,017 principal & interest
• $213 mortgage insurance
• $271 property taxes ($3,250 annual)

Total: $2,501/month

Debt-to-Income Ratio: 53.3%

($525 existing debts + $2,501 mortgage) / $5,667 income = 53.4% DTI

FHA allows up to 50% DTI with compensating factors, but 53.4% was borderline. My loan officer said I would need strong reserves (6+ months) or I would need to pay off my $385 car loan to drop DTI to 46%—which I could do by using money from family or selling my car and buying a cheaper one.

6-Year Total Mortgage Insurance Cost: $15,336

$213/month × 72 months = $15,336

This was my biggest concern with FHA—paying $213 every month forever unless I refinanced. Over 10 years, that’s $25,560 in mortgage insurance.

Conventional 3% Down Analysis

Down Payment: $9,750 (3% of $325,000)

Conventional 3% down programs (Fannie Mae HomeReady, Freddie Mac Home Possible, and standard conventional) allowed me to put down just $9,750—saving $1,625 compared to FHA’s $11,375.

This left me with $1,750 for closing costs instead of $125—still not enough, but I only needed seller to contribute $5,000 instead of $6,500.

Loan Amount: $315,250

No upfront premium—loan amount equals purchase price minus down payment. This was $3,864 smaller than FHA’s $319,114 loan amount.

Interest Rate: 6.75%

Conventional rates were 0.25% higher than FHA at my credit score and down payment level. At 688 credit with 3% down, I was quoted 6.75%.

Monthly Principal & Interest: $2,045

Even though my rate was 0.25% higher, my P&I was only $28 more per month than FHA because my loan amount was $3,864 smaller.

Monthly PMI: $227

At 688 credit with 3% down, conventional PMI was quoted at 0.86% annually: $315,250 × 0.86% = $2,711/year = $226/month

This was $13 more per month than FHA’s $213 mortgage insurance—BUT this PMI automatically cancels when I reach 78% LTV, which my loan officer estimated would happen around year 6-7 with normal payments and 2-3% annual appreciation.

Total Monthly Payment: $2,543

• $2,045 principal & interest
• $227 PMI
• $271 property taxes

Total: $2,543/month

This was $42 MORE per month than FHA ($2,543 vs. $2,501).

Debt-to-Income Ratio: 53.7%

($525 existing debts + $2,543 mortgage) / $5,667 income = 54.2% DTI

Conventional lenders typically cap DTI at 45% for borrowers with less than 700 credit and minimal down payment. I was way over the limit.

My loan officer said I had two options:

1. Pay off my $385 car loan (dropping DTI to 48.1%)—still too high
2. Pay off both my car AND student loan (dropping DTI to 44.9%)—barely acceptable

I chose option 2. I used $8,200 from savings to pay off both loans entirely, which dropped my remaining savings to $3,300 but got my DTI to 44.9%—just under the 45% limit.

This was painful but necessary for conventional approval. FHA would have been more lenient on DTI, but the long-term savings from PMI removal made it worthwhile.

6-Year Total PMI Cost: $16,344 (but only paid for ~72 months)

Wait—this looks worse than FHA, right? $227/month × 72 months = $16,344 versus FHA’s $15,336.

But here’s the key difference: conventional PMI automatically cancels at 78% LTV. With 2% annual appreciation and normal principal paydown, I’m projected to hit 78% LTV in month 68-72 (approximately year 6).

After PMI cancellation, my payment drops from $2,543 to $2,316—saving $227/month.

Total PMI Paid Over 6 Years: ~$15,500 (slightly more than FHA due to higher monthly cost, but PMI ends after year 6)

Savings Years 7-10: $10,896 ($227/month × 48 months = no more PMI payments)

The Long-Term Math: Why I Chose Conventional

Here’s the comparison over 10 years:

FHA Total Mortgage Insurance (10 years): $213/month × 120 months = $25,560

Conventional Total PMI (10 years): $227/month × 72 months (until PMI removal) = $16,344 Years 7-10: $0 (PMI removed) Total: $16,344

Conventional saves $9,216 over 10 years compared to FHA

But that’s assuming I keep the loan for 10 full years. Here’s how the comparison looks at different timeframes:

Year 3: Conventional costs $408 MORE (($227-$213) × 36 months = $504 extra PMI, but $1,625 less down payment and $96 less interest from smaller loan = net $408)

Year 5: Conventional costs $700 MORE (still paying higher PMI, haven’t reached removal yet)

Year 6: Breakeven point (PMI removal happens, cumulative costs roughly equal)

Year 7: Conventional saves $2,724 (first full year with no PMI after removal)

Year 10: Conventional saves $9,216 (4 full years without PMI)

The decision hinged on one question: how long did I plan to keep the home?

If I planned to sell or refinance within 3-5 years, FHA would be cheaper because I wouldn’t benefit from PMI removal. If I planned to keep the home 7+ years, conventional would save thousands because of PMI cancellation.

I decided I planned to stay at least 7-8 years (my job was stable, I liked the neighborhood, and the townhome was in a good school district for future family planning). That made conventional the clear winner despite costing more initially.

What I Had to Sacrifice to Make Conventional Work

Choosing conventional required some painful short-term tradeoffs:

I paid off $8,200 in debt to qualify. This dropped my savings from $11,500 to $3,300—just barely enough for 3% down plus a small emergency cushion. If I had gone with FHA, I could have kept those loans and maintained more cash reserves.

I asked the seller to contribute $5,000 toward closing costs. In a competitive market, this made my offer slightly less attractive than cash buyers or buyers who didn’t need seller concessions. Luckily, my seller accepted.

My monthly payment was $42 higher for the first 6 years. This meant tighter monthly budget compared to FHA—$42/month isn’t huge, but it added up to $504 per year that I could have saved or invested if I had chosen FHA.

I had only $1,550 remaining after closing. Between $9,750 down payment and $1,750 closing costs (after seller contribution), I was left with minimal emergency fund. This felt risky, but I had stable income and family backup if needed.

For some buyers, these tradeoffs wouldn’t be acceptable. If you need maximum cash reserves after closing, FHA’s slightly higher down payment but more flexible DTI qualification might be better. If you’re in a competitive market where seller concessions hurt your offer, FHA’s lower down payment and easier qualification might help you close faster without contingencies.

When FHA 3.5% Makes More Sense Than Conventional 3%

Even though conventional worked better for my 7+ year timeline, FHA is the better choice if:

Your credit is 620-680. In this range, conventional PMI pricing is significantly higher (0.90-1.10% annually) while FHA stays flat at 0.80-0.85%. FHA’s lower mortgage insurance cost in this credit range often outweighs the permanent MI disadvantage.

Your DTI is 48-55%. FHA allows up to 50-57% DTI with compensating factors. Conventional caps at 43-45% for lower credit scores. If paying off debts to qualify for conventional isn’t realistic, FHA provides the flexibility you need.

You plan to sell or refinance within 5 years. If you’re buying a starter home and expect to upgrade in 3-5 years, FHA’s permanent MI doesn’t matter because you won’t keep the loan long enough for that to become costly. You might save money with FHA’s lower rate despite permanent insurance.

You need maximum seller concessions. FHA allows up to 6% seller contribution vs. 3% for conventional (on 3% down). If you have minimal cash and need seller to pay most closing costs, FHA gives you more negotiating room.

You can’t or won’t pay off debts to lower DTI. I had to pay off $8,200 in debt to make conventional work. If you don’t have that option or don’t want to deplete savings, FHA’s more lenient DTI standards make qualification easier.

How PMI Removal Actually Works

One thing I didn’t fully understand until my loan officer explained it: PMI doesn’t automatically come off when you think you’ve reached 80% LTV. Here’s the actual process:

Automatic Removal at 78% LTV (scheduled amortization): Based on your original amortization schedule, PMI automatically cancels when your scheduled loan balance reaches 78% of your original home value. For my $325,000 purchase, that means when my loan balance drops to $253,500 through normal principal payments.

At my payment rate with 0% appreciation, this happens in approximately 8 years 9 months—longer than I expected.

Borrower-Requested Removal at 80% LTV (with home appreciation): If my home appreciates faster than expected, I can request PMI removal once my loan-to-value drops to 80% based on current property value (not original purchase price).

Example: If my home appreciates from $325,000 to $365,000 by year 5, and my loan balance is $292,000, my LTV is 80% ($292,000 / $365,000). I can request PMI removal by:

• Ordering a new appraisal ($500-$700 cost)
• Submitting formal removal request to lender
• Lender verifies I’m current on payments
• PMI removed upon approval

Most borrowers use this method rather than waiting for automatic removal, because 2-3% annual appreciation accelerates the timeline significantly.

My plan: Request PMI removal in year 5-6 once home appreciation + principal paydown gets me to 80% LTV based on new appraisal. This saves 2-3 years compared to waiting for automatic removal.

Resources That Helped Me Decide

Several tools helped me compare FHA vs. conventional 3% down:

Browse Lenders connected me with a loan officer who ran both scenarios side-by-side with identical assumptions. She showed me the crossover point (year 6) where conventional’s PMI removal starts saving money long-term versus FHA’s permanent mortgage insurance.

Middle Credit Score helped me understand why my 688 credit was getting quoted 0.86% PMI on conventional. The education around credit-based PMI pricing showed me that improving to 720+ credit before applying could have reduced my PMI to 0.65-0.70%, saving another $50-$60/month—useful information for future refinance planning.

Cash-Out Refinance planning tools helped me model what happens if I want to refinance in 5-7 years to remove PMI early or access equity. Understanding my refinance options made me more comfortable with conventional’s structure.

The biggest lesson from my comparison: FHA isn’t always cheaper than conventional 3% down, even though FHA’s lower mortgage insurance rate (0.80% vs. 0.86%) suggests it should be. The permanent vs. removable structure of mortgage insurance matters more than the monthly rate for buyers planning to keep their homes long-term.

For me with 688 credit, 7+ year timeline, and willingness to pay off debt to qualify, conventional 3% down saved $9,216 over 10 years compared to FHA 3.5% down—despite costing $42 more per month for the first 6 years.

If you’re comparing these programs, I recommend getting actual quotes from lenders specializing in low-down-payment programs and asking them to show you the crossover point where PMI removal makes conventional cheaper than FHA. Your middle credit score dramatically affects PMI pricing, so use your real credit numbers rather than generic estimates.

The decision between FHA 3.5% and conventional 3% isn’t about which program is universally better—it’s about which program matches your credit, down payment, DTI situation, and planned holding period to minimize total cost over your actual timeline.